In this episode, Alan Dunne and Cem Karsan explore a market that appears calm on the surface yet increasingly unstable underneath. As indices move sideways, they discuss how options flows and structured products are reshaping market behavior, driving rotation rather than direction. From the weakening of former leaders to the rise of defensives, the conversation turns to what these shifts may signal about a broader topping process. They also examine the growing influence of AI narratives, political incentives, and global tensions, not as isolated shocks but as forces building pressure within the system. The result is a discussion about how markets evolve when structure, policy, and sentiment begin to move out of sync.

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Episode TimeStamps:

00:00 Intro to the Systematic Investor Series

00:23 Performance check: CTAs strong, trend tailwinds

03:13 Range-bound indices, but big dispersion and rotation

03:45 Why options pin the index: dealer flows and vol compression

05:42 Dispersion mechanics: idiosyncratic risk, falling correlation

07:32 Rotation as a topping process: leaders fade, defensives rise

09:54 OPEX and quarterly expiries: why timing windows matter

11:56 The March support effect, then weaker flows into April

17:02 AI narrative shock: anxiety, backlash, and policy consequences

22:32 Populism versus deflation stories: why inflation returns

32:43 Gold outlook: secular bull, but expect two-sided volatility

45:45 Rates as “tectonic plates”: vol compressed now, release later

50:23 Midterms, incentives, and the fight for control

57:42 Liquidity loop: markets stop rising, collateral stops expanding

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You're about to join Niels Kostrup Larson on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy.

Welcome to the Systematic Investor series.

Welcome back to the latest edition of Top Traders Unplugged where each week we take the pulse of the markets from the perspective of a rules based investor.

It's Alan Dunn sitting in again this week for Niels who's still in sunny Miami.

And I'm home already but here in the hot seat talking to Jem today.

Jim, how are you doing?

Great here in Chicago in the hot seat believe it or not, 61 degrees and sunny in Chicago in February.

Nice.

So no, no major suns or snowstorms disrupting things in Chicago?

No, we were able to sidestep it.

We never get the sidestep.

We always get the front of snow in the face.

But no, this time somehow we sidestepped it.

Very good.

Well, plenty to talk about.

We've no shortage of, of macro themes and topics and interesting developments in markets.

Obviously equities continue to gyrate, the rotation, trade etc and you know, markets under a little bit of pressure today already.

But maybe just, I mean to talk about performance because it was helpful just to give the performance in context.

We've had a very strong run for managed futures in the last six months or so continuing this month.

So on the month Now, Soc Gen CTA index is up 2.96% and SocGen trend index up 3.38% and year to date the Soc Gen CTA index is up 7.8% and the trend index is up 8.25% and for the short term traders also doing well, 0.8% on the month and 3.15% on the year.

So certainly positive sentiment around that.

And I think coming from iconnections this week that was certainly felt in terms of positivity around hedge funds in general.

But CTA's also certainly participating in that positive narrative.

Obviously a lot going on markets wise.

But in terms of hedge fund performance and, and CJ performance it's key.

It's been a good stretch.

Janice.

Absolutely.

And we again have talked about this with Homer, with, with all kinds of other people across the board here.

I think the reality is this is going to feel a lot like 22 and you know Niels and I were talking a little while back about this.

22 was obviously a great year for trend.

Why it actually ties into our volume complex when volume is well supplied and we're going to get into this, I'm sure with dispersion a little bit later today, what you end up discovering is that the rotation is much higher and that rotation paired with a clear trend and broadly once that rotation starts represents a lot of opportunities for those who understand what's happening under the hood.

So I think that's, that's what we're beginning to see.

Expect more of that this year, knock on wood for people like us.

But, but I am, I am again qu optimistic for this year trend.

Good stuff.

Well, I mean that's probably a good jumping off point.

I mean, in terms of where we're at at the moment, obviously you look at the broader indices, I mean the S&P 500, Nasdaq edging a little bit lower, but broadly in a range for the last kind of two to three months.

But within that, obviously a huge amount going on in terms of dispersion in terms of rotation and big moves at the sectoral level.

Industrials, material, stocks doing well, obviously.

Staples.

Yes, and staples doing well as well.

And software under pressure.

I mean the temptation is always to assign a macro narrative to it.

But you know, obviously there's a lot going on from an options and a market flow perspective as well.

So what's your perspective on what's driving it?

Yeah, we always try and educate on this.

Obviously we've been talking about this for a good five years publicly, but hope, you know, every time sometimes we still confuse people.

This is the most important concept of how markets work these days.

And if you don't understand this and you're in markets, you're missing one of the biggest, most important things in markets.

And the reality is that markets are one of the biggest proponents.

Components in markets these days are options and things that look like options, things structured products and other things that sell forms of volume, particularly upside and at the money volume.

And those are primarily at the index level.

And because they're at the index level and because they're bigger than ever, what you get is a lot a volume compression, which means the indexes themselves are quite pinned until a big enough event happens or something that can release that volume or make it squeeze higher, which generally is a move up or some type of bigger, big enough event that's a shock, a true surprise to markets.

The broader index then is pinned and that happens because again, dealers are long the volume that they're getting delivered.

They have to buy when the market goes down and sell when the market goes up in order to capture a profit.

This pinning effect, which is volume compressing at the index level.

And this is the part that's very counterintuitive, forces things at the singlest level to move away from each other.

Why would that happen?

Why would single stock volume actually tend to increase and why would importantly correlation dramatically decrease when that happens?

Pretty simple.

Idiosyncratic risk still exists in the world.

There is always some news, right?

If news happens, by definition something happens to one stock based on earnings, other stocks, CEO passes away, new techno, new drug comes about.

Those drugs will move because they're not the Vol centers themselves.

And idiosyncratic news matters for that one stock.

But if the market is pinned, that means things have to go the other way to compensate for this.

And so what this does is this drives massive rotation, dramatic rotation.

And actually what we see is, is increased volatility historically at the single list while index is pinned.

There's no coincidence there that you see an outlier right of two things relative to the long scope of history.

And ever since then we have only seen a different, almost a bimodal change to how dispersion works, how single list relative to index works.

And there's, there's a reason for that and that's the, the growth of options and structured products and their effects on the underlying at the index level.

So that is happening in spades.

We called for that about four months ago.

We said wait the next six months till about April, May.

You will see not only volume compression, the index level, but massive rotation.

And that's what we're seeing.

So it's important to understand that's the true driver here.

This is a topping process that's defined by sideways chop.

And even though the ball of like risk is, is expanding, the index is pinned as a result.

And, and that's driving historic dispersion.

And shouldn't be a surprise in a topping process that we are seeing the, the generals being shot.

This is what happens, this is how it works.

If the generals are being shot and there is going to be weakness there.

You have to see strength somewhere if the index is pinned.

And, and shouldn't be a surprise that that money goes to more defensive underperforming areas.

Places are more that are more were out of favor and under owned.

And that's why we've seen things like staples explode higher In a way that's almost incomprehensible to people.

Right.

Like 30%.

You know, for something that is not growing earnings really it's not a, it is a, it is a structural phenomenon that is the counterweight to the other side of what's happening underneath the hood.

Something like energy.

Again, great, great performance.

Why?

Same reason again what people will paint.

Some of that is idiosyncratic by the way, to be clear because of the things going on, Middle east etc and, and those are driving some move in energy.

But that's been dramatically shorted under owned early in the year.

So shouldn't be surprising if you get a little positive news there, a little bit of push on something that's under owned.

Especially given the pressures and the other items that are core to, to the market leadership that, that would get a huge kind of push up.

But once that starts going well, that pushes the other things down as well.

And so this is, this is the process that is so critical to understand and allows for prediction, understanding of rotation and when to move and where to be.

And obviously you described the kind of the impact on the index is that the kind of the range stays intact, I guess driven by the gamma flows.

I guess.

I mean are you looking at a schedule of expiries to give an indication of when this might be more susceptible for a breakout?

Yeah, absolutely.

So you, you see often these headlines that this opex is the biggest opex in history.

You'll hear that like all the time now.

And, and the reason is, is because almost every opex is the biggest in history.

The growth of structured products and the growth of option flows is not.

Is secular and is ex.

You know, exponentially increasing at this point.

It is a such a small part of the market that is accelerating and creating adoption.

I like to liken it to kind of a tipping point for a technology.

It is a more precise tool.

The problem is it didn't have enough volume and network effects for adoption until more recently.

And the impetus now obviously paired with those network effects of a need for more non correlation, more capital efficiency is driving and not just a bull cycle, but a exponential growth there.

And, and so.

So yes, so each expiration matters more because they tend to be issued at expirations.

But obviously the most important ones are the quarterly opexes.

And we've talked about this at length.

You know, March, June, September, December, always the biggest.

It's not a coincidence that historically we've seen tons of Vol events when the volume events happen like in that Feb to March window in that August to 7th SEP window, you know, selling may go away is not a coincidence.

These are things that are structural to those realities.

What I think I would highlight that's important and why I feel strongly that this fall compression will continue despite the bad macro and despite what I think is a topping process is because we are seems like we are clearly sidestepping the volume event in the Feb March window which is kind of what I expected this year given the size of volume compression which will mean support into March opex.

And that's counterintuitive to people who think up down right.

But the reality is when you have short put exposure to dealers and dealers are short stock and long call and long volatility at the money, what that drives is either a activation of that left tail in the markets that then creates a volume or which is rarer but when it happens it is a tinderbox in a sense underneath the market.

But if that doesn't happen, it doesn't start early in a cycle.

That risk needs to be bought back, meaning the futures hedges and what's being protected against those structured products needs to be bought back.

And that is ultimately a buying structural pressure.

Those are those VA and charm flows that we talk about and those von and charm flows are coming there and they come, you can see them during different parts of the day.

And this is why we keep getting sell off and then buy back, sell off, buy back.

Expect more of that regardless of this military action that we're probably like to see in Iran.

You know, expect that despite all of the other things work you can go through today in macro and how wild this is in the short term.

But once more tropics comes through those V and charm flows dramatically drop off and that would be a period where I would be much more cautious getting into late March into April.

Once those flows are off the table, it doesn't mean again those, once those flows come off the table doesn't mean we're going to have AOL event again.

It means VOL is likely to still be compressed.

It's just the supportive flows come off the table and you're much more likely to see kind of a stair step down continuation of some kind in that window.

So my view is, is, you know there's probabilistically the window is much more sell in May and go away this year.

Maybe it starts in April, but we've been talking about that for a while

now and the view that this is very much a topping process as opposed to a consolidation ahead of a move up.

Obviously we're seeing more negative price action in what you call the general, the previous leaders.

Is that what's given you confidence?

It's the topping process?

Yes.

I think there's a couple, couple things.

A big one is here.

Let's, let's put this way.

Consumer staples are up 30%.

There's a reason markets when they rotate this way are, are seen as weak.

That is not where the growth is.

That is not where multiples are going to expand.

That is not where if they get more money, you know, consumer staples aren't going to all of a sudden put that back to work and drive a capex cycle or, or you know, it.

It is a defensive part of the market.

There is a limitation to how far and how fast certain areas the market can go.

And, and meanwhile, you know, now that we've gotten moves for example in software to a point, there's so much concentration and leverage in those parts of the market that despite the market itself being placid, you're creating massive risk underneath the surface.

There are people who are in institutions that are stuck that, that have to get out and that if it gets worse will have to liquidate.

Despite what we're seeing at the index level is nothing exciting.

Think something like long term capital management.

The way a risk really appears from a placid market pinned environment is through concentration, leverage and illiquidity.

Again, concentration, illiquidity and leverage always is the reason that things go from a placid state to something bigger.

So what we're seeing is that under the hood, if you look at private equity and private credit, that stuff shouldn't be a surprise to you.

I've been again talking about that for a while being a kind of canary in the coal mine that it will get worse.

That itself is a tinder box sitting underneath the market.

And you know, when something comes down 50% like software has, all of a sudden everybody starts playing for, to buy calls to you know, oh we're going to, this is going to come back right away.

This has been an incredible opportunity.

Guess what?

Dead cat bounce.

Dead cat bounce, Dead cat bounce.

It's not a surprise because there's overhead supply that needs to get out that stuck.

And ultimately until the, the those that are stuck get out, you know that part of the market is stuck.

I'm not saying software is going lower per se.

It is incredibly cheap.

I actually am very bullish of software.

Come six months from now, put it on your board, you know, put up and come back to it in six months or nine months or whenever it is.

Right.

But, but the, the truth of the matter is that part's not coming up quickly anytime soon.

The leadership has major issues and the part that we've rotated now to is, is reaching its capacity for how far it can go.

And so at some point this falls out, you know, under its own weight.

So yes to your answer.

Yes, it's partially from the outside looking in.

It's partially because, because of what's happening under the hood.

But understand that that itself is a representation of reality, not the opposite, and that the actual rotation is a function of pressures in the system or holding things at bay.

But the reality is the market's already on its way down.

Well, you mentioned kind of three factors or two which are related to a third which is AI.

But I mean, we're talking about private credit and, and you know, we've all been talking about private credit and the risks in the space and, and, and how just because you put a label of private on it, it doesn't mean it's diversifying.

And we're, we're very much seeing that obviously a lot of the private credit exposures are to software, which has been underperforming.

And obviously the big thing with driving software is this shift in the narrative around AI.

And obviously we had more out this week around that with this research report, the Citrini research report, which has been much discussed, very, very provocative, you'd have to say, but paints a very stark, I suppose, picture of the potential impact.

I mean, the software side of things is only one part of it, obviously the deflationary impacts, the impacts on white collar workers, et cetera.

I mean, I think most people in the market would obviously see it as a very extreme representation, but it does point to a fairly logical narrative that we could be into, if significantly more disinflationary period, if we get this greater adoption of AI.

So curious to get your thoughts on that and where that fits in and how it may drive markets from here.

The most important thing about the Citrini piece, which again everybody, that, I mean, I was shocked.

People who don't even really follow markets, kind of high net worth individuals who are, that are, that are not even looking at markets on daily basis are asking me about the article, right?

The biggest and most important thing that that article showed me was that how anxious the world is about this.

The, the converse fact that we're talking at length about this substack article by, you know, somebody who has actually, we won't even get.

This isn't a comment on him or whatever.

It's, it's not, it's not like a research piece out of Goldman Sachs although now responded to it.

That is that that is the biggest, most important thing we should recognize.

And why is that important itself?

Because there is a political consequence to this that everyone is ignoring.

There is a social zeitgeist and anxiety that to.

To.

To what is about to happen and it is not just starting to slowly come into the, the psyche.

It is now starting to explode.

Okay.

And that is so critical and we all like to think about things in a, in a closed loop as if oh this is.

Technology operates in this world where outside of reality it does not operate outside of the real world.

It is part of a much bigger real world with other things that affect it.

Okay.

And so I think that the real, real thing that people are completely underpricing in my opinion is the real time pushback and political backlash that, that I would expect coming from this.

That is the most important thing that you can think about.

Let me first that paired with I'll give a couple more things before I want to get back to that is there's way more friction in the system than people expect to.

I'm not saying it's not coming fast.

It is coming fast and it's coming faster than people expect and they should wake up and people need to adopt it.

And yes, that but, but not just the friction in the system, not just the, the political backlash and, and the regulatory things that have not caught up to it which will start to catch up.

But importantly, you know, there's all kinds of questions big corporations, enterprises about how they adopt these things and, and, and how it's going to be used.

Just because a new technology comes about and changes the world doesn't mean the adoption of it happens as quickly as people think.

And historically that's all always the case.

Importantly that, so you have friction in the system that's being underestimated.

You have a incredible based on the talking about the article, an incredible pushback and political backlash that's likely coming quicker than people expect.

And lastly there is, there's an assumption that again this is all in a vacuum.

This assumes no global conflict, no internal upheaval, no commodity shortages, free flowing capital and strong liquidity continues.

Yes, and none of those things are guaranteed.

And I will, I will actually highlight as we're talking through today, I am willing to bet that one or more of those become a problem in the next year or two.

And so my point is is, is not only that this is far from guaranteed this world that is being painted.

But it is much more likely than not incredibly uncertain in one of many, many paths, and a less likely one at that.

I would paint.

I will, I will follow back on to the most important part, as I mentioned, which is the pushback and political backlash piece.

Everyone, as you're seeing in the long end of the curve now, and everyone in the political dialogue has now turned deflationary universally.

You can see it in positioning.

I have now for, you know, six years been talking about how we are in the next 20 years, starting six years ago, going to a structurally higher interest rate environment died to populism.

Not surprisingly, this has been.

We've talked about this throughout time.

The big pushback to that.

Well, what about AI?

This is the big conversation.

This is the most important thing in finance, the discount rate.

What is going to happen to the price of money?

What is going to happen to the long end of the curve?

This is now the third time in six years that the world has turned deflationary again.

And every single time was right before a more inflationary push.

I do not know how quick this will be deflationary.

And I'm not saying that technology is not deflationary.

Since the beginning of time, you know, growth of technology is deflationary.

And I understand the speed of this is quick and that it's accelerating.

But one thing I know for sure is that populism and the growth of populism is increasing demographically.

That's why I know it for sure, because the baby boomers are dying off and the millennials who are believe that they need a much more fair system and that the system is broken are coming to political, domestic.

We know that that's demographics and that's accelerating just demographically, never mind the level of frustration because they are not getting what they want.

As we saw this last year, actually, the K shaped economy is becoming more K than ever.

And add into that the now combustible AI realities, because this is not just deflationary, but this is hurting the exact kind of cohorts that are most of pain.

Yeah.

I ask you, was Covid deflationary?

If we sat here before COVID and looked at Covid, we would say that's probably going to be really deflationary.

All of the waves of inflation that we see in history are driven by a catalyst, a catalyst that then releases the political realities that are actually underneath the hood.

So I would ask people to not worry so much about the deflation that is likely coming from the catalyst, which is AI.

I would instead look past that for what the much bigger trend is and what is likely to come as a result.

Yeah, well, that's interesting because when I read the Citrini Report, one thing that is notable is that it doesn't discuss any policy reaction at all.

There's no mention of what the Fed would do in this environment.

I think it does touch on kind of yields falling.

But I mean, this is at the heart of.

We can talk about Kevin Warshead.

I mean, he has touched on this.

If you go back to his TV interview, I think I saw it on CNBC last summer, he said AI makes everything cheaper.

So he's already been positioning for this.

So, I mean, that's one dimension.

And then you've got the fiscal side as well.

But as you say in the first instance, and Covid was the same.

I mean, the initial impulse from COVID was disinflationary, deflationary.

How long did that last?

Well, it lasts.

Yeah.

Actually about a couple of quarter, maybe a month.

A month?

Well, I mean, if you shut the economy down, that does stop demand growing pretty quickly, but as soon as it comes back.

But the way you get markets going, by the way, similar to last year, is you get markets down.

Yeah.

So then you can generate a response and the response itself becomes the thing that moves markets paired with people getting short.

Institutions are at the 0th percentile last June, and then guess what?

Now they're back at the, you know, they got up to the 50th and now are back down to the 40th or so.

Right?

Yeah.

And so, yeah, this is not a conspiratorial thing.

If you're sitting in that chair and you're besant at all, and you're trying to figure out now that there's this overhang of, you know, you have all the refinancing of debt and the liquidity draw and markets themselves, which are the biggest driver of liquidity, have now slowed and are no longer kicking in.

And you can no longer do, you know, issuance at the short of the curve and increasing that like you were before.

You're kind of stuck.

No, exactly.

How do you get into the market going into the midterms or into the rest of the year, what do you do?

You got to take it down to take it up.

So.

So that's part of the whole story here.

And, and I think that pairs really well with the AI realities that we're seeing.

And so I think markets look forward.

And so I would encourage you to, yes.

Be prepared for the deflationary part.

But if the deflationary part will last a minute and the real story is still the big one, which is the secular realities underlying populism and the move of money from the top to the bottom and the political necessities of them.

But is, does that mean, I mean, you're skeptical about the actual ultimate level of adoption of.

No, absolutely not.

Okay.

What this means is we're heading to UBI and that we're heading to people getting big checks at the bottom to placate and get people on the bottom of the distribution less angry.

But would the likes of Ubi be enough?

I mean, if people are losing their 300,000 jobs a year, you know, Ubi doesn't help you that much, what's it

going to take to make people not be in the streets?

Yeah, okay, so that's what they're going to do and that's a lot.

There is an interesting debate about this because with any new technology that has a productivity impact, there's supply elements, there's demand elements, There is the kind of economic viewpoint that higher productivity means a higher neutral rate because you get a.

It encourages a build out of capex to take advantage of the technology.

So in that scenario, if the Fed is actually cutting rates in response to disinflationary pressures, they're moving in the wrong direction.

And we had this debate kind of back in the Greenspan's new paradigm in the 90s where he was originally keeping rates on hold but ultimately had to raise rates.

But I mean, back then part of the discussion was around financial stability.

Less about that.

Yes, but this is also about financial stability.

I mean this is, yeah, understand there's another narrative we're not even talking about, which is U.

S debt.

The reality of the situation is this is an unsustainable level of debt and it is, it is growing at an unsustainable rate in a populous period that's not going to slow down, it's going to increase.

So there is no way out of this.

And this dovetails into our conversation about the Fed.

This is the why the Fed and the treasury are now on the verge of shaking hands and become coming, you know, not independent.

There is a debt jubilee coming that is the first and most major.

We've known it for a long time, but that is the actual first actionable, like sign that it's coming and not.

They're not just shaking hands and saying we're going to work together and communicate, they're saying why?

And, and the why is because the Fed needs To buy, you know, in Trump's words, like he, they need to buy the US debt that's been publicly talked about.

That's what we're, you know, by the leadership.

That's what's happening.

We need to turn on the printing press or however you want to think about it, hit the button, make all the zeros go away.

To be clear, that itself is not, you know, as people think.

People think that's a big time dollar week or you know, relative to the benefit, it's actually dollar strength because the second you kind of wipe that all out, you have a debt jubilee, you start from scratch again.

But I do think that this, what we're talking about here in the Federal Reserve involvement and turning on the printing presses that inevitably coming as a result of the AI story, everything also is being done because quite simply it's going to help, it's going to be an excuse to solve the bigger issue, which is the US's overhang of, of debt.

So expect a, a response at some point in the next, you know, call it three years while, while Trump is in office, in my opinion of, of a, you know, amidst some crisis that the crisis that is coming to hit the button at the Fed and make all, you know, debt kind of get digested.

We saw this by the way, in Japan.

I don't know why we're going to be shocked that this is going to happen here.

We support it.

We, we, this wasn't Japan's idea as much as it seems.

It was supported by the US Federal Reserve and, and, and as our allies in Japan, we needed to kind of help fix that problem there.

And, and we, we did over 30 years and guess what, you know, there is no external debt anymore in Japan and, and we will move to a similar scenario here.

So I, my point is that is LinkedIn to the coming crisis and the, you know, AI, it all is coming together in a way that is, fits very beautifully into a very simple solution.

And, and that solution is, is really the only way up.

Yeah, I mean one of the expressions of that kind of concern about, you know, debt monetization and maybe dollar concerns obviously has been the metals, gold, silver.

We've, we saw an explosive move higher and then a big correction.

I mean, where from an options market perspective, how does that look now?

What's the expectation there?

Yeah, so again, I think this is important.

I think you know, this, but in, in late 21, early 22, we were very adamant.

One thing we pounded the table on, I'm here along with a lot of Other places is the best performing asset over the next 20 years.

And I said this again five years ago, four years ago would be gold.

And that the, the not only would it be the best performing asset but it would be the most volatile over the next 15 to 20 years.

We said that again four or five years ago when, when it was a very unpopular opinion and that the answer was to buy out of the money calls on gold because you both benefited from volup market up volup and you, you got the convexity.

That has been the best trade that you could possibly have made during that period.

That is not over again that was a 15 year old, no pun intended call.

We are, we are amidst a secular move now that is not a three month call.

That is a 15 year call which we are about five years into call it.

And, and so this is how you play this game.

You play it with out of the money volatility to the upside and it will be volatile.

And actually the, the at the beginning of these moves they are, they're more you know, right tail volatile but eventually they become more two sided volatile with right tail volatility.

And the reason is, is the more something triples, the more speculative interest there is, the more social zeitgeist and understanding of the reality there is.

These are later adopters.

Early adoption means people everybody needs in.

But once people start getting into a convex product it becomes more two sided volatile because you have to keep flushing out the weekends.

And that's where we are now entering in terms of precious metals.

It has entered the social zeitgeist.

People understand the realities, they are speculating, it is moving fast.

But you are going to get some real tail wagging in precious metals going forward.

The most unique thing to what's happened to gold so far that will not happen is that's been one sided.

Uh, and so expect if we're moving towards things like a debt jubilee that the, that the, you know, are we in deflation, are we in inflation?

The very fact that we're asking that question right at the scale we are means there is at least a very different narratives on both sides.

And, and, and the ability for, for people to lose faith in the reality and then readopt the reality.

But I think the bigger structural reality is the one that is more secular than I've been talking about and that is that that gold is structurally from lots of reasons as the same reasons I talked about five years ago going higher.

So, so if you want a short term answer and not in the big kind of 15 year story the a lot of speculation has come in Even though I'm a a big structural bull and I would never in a million years short precious metals I'm always going to be long some structural amount and trading around it particularly with expect that seeing that I I see this year as much more of a 22 type year market down vol down before a reversal later in the year.

They got bailed out of precious metals.

People have gotten longer and longer precious metals and I think this will get pulled in increasingly to a beta one kind of market down kind of environment for six months or so and then it would be a time again to buy it with convexity to the upside later in the year.

And that view on equities market downfall down is.

I mean that's because people are already positioned for further to have downside cover on a zealot or is there something else?

It's part of it for sure.

So.

So it's several things.

One massive structure product issuance that's driven by people trying to get out of equity exposure and non correlation and the more they move into non correlation and move to these types of trades reflects that they are.

They're all compressing as well.

That's the biggest part.

The very important big part as well is that volume data to markets is cyclical.

Shouldn't be a surprise.

We've talked about this at length.

Why?

Because you know if people are hedged, guess what?

The market doesn't go down fast.

And if people are not hedged when it does go down it goes down fast and not just hedged.

It's the reflexive gamma effects of that, of that.

Of those realities.

So I mean like again I've walked through this history at length several times but you know, if we just got a massive volume everybody's fighting the last war, right?

If we just got a massive volume event last April and even the August before, right.

We had an incredible success of adding volume to the portfolio during those periods.

Everybody said well why would I sell my stocks?

I can just go buy some downside protection and that'll protect me and I could be lawn the market with beta.

You know, I leveraged and just own some vaught.

Oh okay.

Shouldn't have been a surprise that 22 came in, you know and told everybody the opposite.

And what happened after 22 market down Vol down.

Do you remember that?

I mean that was pretty painful for anybody who was in the volume space or trying to hedge and everybody Matt Mass, you know, exodus to volunteer as hedges.

And if anything the ball selling accelerated because you know, if it makes money in the meantime it's not going to help you when the mark goes down.

Why own it?

23, 24, 25, right.

Volume compression and then boom, fall event, all event.

And so we're on the other side of that.

We're in the, we're in the, the.

You better be hedged.

The market's crazy.

The world is crazy.

You got to own puts.

Don't want to sell my stock, it's up all this money, I don't want to collect, you know, pay the taxes, etc.

Etc.

Put a band aid of all on it.

That should help.

No, the pain trade is what happens when the market goes down.

What is the most painful thing to the most number of people?

And the answer right now is market down, fall down, precious metals down.

Right?

That is the most painful trade.

So if you want to know what the highest probability is, that's the highest probability trade.

I mean away from the macro, there's plenty of political, geopolitical risk out there at the moment, events unfolding.

We've got, you know, concerns around Iran, a possible strike there.

Are these events adequately priced?

Are they going to be meaningful?

Are they greater risk events than currently priced, would you say?

The reality is markets in a, as you know, are a voting machine.

And so a lot of what we're talking about, the macro matters and it matters more on a multi year basis.

And, and, and things like that are big structurally important things like what is happening in Iran are very important structurally to economic outcomes, but really only in the sense that they somehow affect the flow of capital and the flow of kind of economic consequences.

And so us going into Iran, which yes it does seem, you know, as much as I, I think their words a way out and there would have been a preference by this administration and for a way out of, of this.

They were pressured heavily by a consortium of the, you know, across the Middle east to, to avoid this outcome.

But Iran has been, you know, bolstered, you know, this has become a proxy or both bolstered by China and, and has held kind of in, in strict opposition to some type of a kind of a deal.

We are going to go into Iran and it's going to happen soon.

And my view is that, that, that is, you know, as much as they're trying to prepare for the oil energy effects, that is an accelerant to a global conflict.

We are going towards, and I've been saying this again for five years before Russia, Ukraine even happened, going towards a broader global conflict.

You know, Venezuela was a proxy war, Iran's a proxy war, you know, Israel in Gaza is a proxy war and eventually Taiwan will be a proxy war.

The reality of where we are right now is this is an important accelerant.

The Middle east has always been the most dynamic spark and, and accelerates to global conflict and this one is in my opinion an important one.

So that said, it's not what's going to drive some big shock today because it's understood, it's well known, it is only through the flow of oil in the short term that that could be a much, you know, if we saw a huge spike in oil and they weren't able to control that, which I think they will because they've coordinated with Saudi etc.

But, but, but outside of that, you know, I think, I think this is more an accelerant to a much broader process.

So it needs to be measured and weighed.

It, it likely needs, means more of a breakdown and bifurcation of world, the world order which has been, we've been treading trading to trending towards for quite a while now and but that we don't need Iran to happen or not happen to see that's where things are going.

This is just a kind of an accelerant and a moment, an important moment in that and where we're heading there.

And from a market perspective obviously it is reasonably well priced in expected at a stage.

It won't come as a shock if there is a move but I mean second order impacts are more prolonged impacts.

Yes.

Think about it this way.

We knew Covid was happening in December.

You know the narrative of it being important didn't matter till, till late February or middle of middle of late February.

This is important and it's maybe not a Covid situation, but pair this global increase in global conflict which is only accelerating from here.

Pair it with the political voting kind of laws that are being passed in the US that's going to happen around midterms and the likely internal upheaval that's happening.

So external upheaval, internal appeal in the US Pair that with the AI disruption we just discussed.

You know, this is a building of pressure in a system that is very structurally and by the way we're at record valuations at the same time.

So these are, it's a, this is a recipe, right.

That doesn't mean the market is going to crash.

It does not mean.

But the, the pressures on the system, the risk relative to the potential returns in the system are, are building and are importantly dangerous for markets.

And, but the flows will dominate between and I, I think much more likely and they're not unknown things.

Right?

That's the other thing.

It's the, you know, the pot being boiled.

So, so again an argument for market down Vol down, you know, a slow controlled demolition that then necessitates a response but is not, is not, you know, at least for the, the powers that be here in the US does not lead to an uncontrollable situation that they could not then kind of manage.

And so this is again the most likely path for lots of reasons I mentioned.

But, but, but again just because those things are happening and known does not mean they're already priced in a sense.

I mean you talk about you know, Vol already being elevated in.

In equities and metals and curious to get your thoughts on fixed income because obviously yields have been very much trapped in a range but three and a half years now.

So is that an area where we could see that Vol expansion and what would that mean?

Great question on answer is if we are in entering a, let's say one a nine month period or so, you know, into the end of a midterm period that is likely building in pressure with reactionary forces and it is deflation seen as deflationary with a.

A potential to likely, I would say likely inflationary response.

How do you trade that?

And the answer is building pressure in a system.

Sumo market I like to call it lots of.

Just because two tectonic plates are pushing strong enough against each other that something doesn't move doesn't mean it's safe because the more pressure that's in a system the more combustible it is once a move happens.

So my answer is as in the, in the short to medium term I think it is volume compressing much like tectonic plates are ball compressing.

But the ultimate response will be a dramatic release of volatility in that space.

And I think that's probably you know, six months plus out.

But I think if you play for you know, coming significant dramatic structural volatility there in.

In the future while still being, you know, short of that volatility in the short term, I think that is probably the big structural play there.

You mentioned briefly their elections obviously the midterms are a big factor kind of that, I suppose, looming over the markets in the back end of the year.

I mean, obviously, I suppose the narrative to date has been the administration is going to want to run the economy hot, keep policy easy, know, get prices down, get rates down.

Have had mixed success on all of that to date.

And obviously the economic data has looked a little bit disappointing.

Q4 GDP coming in well below expectations.

So there's the kind of the economic element to it and then there's the kind of the practicality around the voting and some of the concerns around that, you know, and possible voter intimidation, et cetera, which we've talked to people like Gary Gerstler on the podcast as well.

So I mean, where do you see this playing into that kind of trajectory of markets, you know, you've been talking about possibly Dan, recover later.

Midterms obviously will be in November.

So where does that fit into that timeline?

Yeah, so you have to understand incentives.

There's a structural flows and the supply and demand, but then there is for the things that we don't know that are more human, the bigger picture things, those are, those can be kind of modeled broadly based on incentives.

And that's, that's a harder thing, but it is actually, you know, statistics are a thing and human beings themselves and entities do react to those incentives.

So the reality is that, you know, all politicians, and this is a kind of probably a magnified version of this, are trying to maintain control and stay in power, whether politicians, dictators, leaders, however you want to think about it, right?

People in power want to stay in power.

The question is how far are people willing to go to stay in power.

And we've gone to an extreme in terms of, I think how far this administration is willing to go to stay in power.

And I think that's not controversial at this point.

We talked about it maybe when it was controversial, you know, State of the Union, you know, just happened and President Trump was pretty vocal again at hinting to he, how he plans to be here for a third term.

Hahaha.

Laugh about it.

Say the quiet part out loud.

That is very much true and I've talked about that for a year plus very publicly, you know, if you are intent to do that, your intent to maintain power.

I know about this because I come from a part of the world where, where this has been the case, you know, and, and by the way, you know, the playbook has been played out and, and put in front of, of Trump for a long time.

He's become very close to Erdogan and he's watched how he's managed these things.

This is not a coincidence.

There is a playbook and it works.

I hate to tell you, it works.

And the US Is not immune from it.

And so the administration knows that they would like to win without control because that's just, they can win without it.

That's just.

They have the public support and they did it fair, fairly.

Right.

But if they can't, they'll cheat.

And that's not a judgment on Trump, by the way.

It's a judgment on, on, on, on, on politicians and power since the beginning of time.

It's like saying that we judged, you know, Augustus and Caesar poorly.

People in power want power and for lots of reasons.

And Trump is no different actually.

If anything, he's a, he's one of the bigger, more he think see things for what they are and says things for what they are, but he does it with, with a, with a bluster and a, a, a lack, a lack of reference, reverence for, for the institutions that came before him.

And so my answer to you is, I think the original plan, as I understood it from people I know on the inside, for a structural kind of overtake of power to control the ballot box later for the eventual election.

But the wave, partially driven by the Epstein stuff, partially driven by the acceleration of AI and the, the UK economy, a lot of these things are leading to incredible unpopularity historically.

So of, of the President in the US and it shouldn't be a surprise that the response to that is an acceleration of, of the things that they need to do for the midterms, because if he were to lose both houses, he will have already essentially lost the final election in the years following because he would lose full control.

And so the, the inability to control the presidency in, in two, you know, in two and a half years, that in that outcome is a function of the midterms going completely against him and, and that is unacceptable to him.

So we are seeing an acceleration of internal control which will then accelerate the response.

So, you know, this is again, all about incentives.

You just have to understand what the goals are and what the realities are.

And then within that, what's happening to the economy and the will then respond to.

And that is, this is a closed loop in a sense.

You know, why we're talking about that six years later and why all of a sudden we need to control the ballot boxes?

You know, I think, you know, the reason for that.

What, what specifically does that mean?

Control of the ballot box.

So they're declaring.

I mean, if you go read the headlines, you know, the, the, there is a, and again, I recommend everybody go take, take a look at, at the actual vege.

But it's a, it's a group of pro Trump attorneys, you know, had drafted an executive order aiming to give President Trump, you know, unprecedent powers over election.

It's a full on control the ballot box, deciding who can vote, who can't vote, what is required to vote.

And, and even though this is actually, you know, not legal, this is the power, this power comes down to the states.

Trump's model has been very clear.

Just think about tariffs.

What he did with tariffs is illegal.

Does that mean it didn't matter over a year and a half?

No, he forces the courts to respond.

And if you do enough things in enough ways and you do them fast and hard enough, it overwhelms the system and you get what you want anyway, at least for some period of time.

And all that matters is that he has that control now for, you know, for nine months or eight months.

Right.

And so they are intent to do whatever they can, illegal or legal or any other way, to change this, the course of this outcome.

And they will layer in whatever they'd have to do to, to do that.

Now, will they be successful?

Hard to say.

Historically, the answer is yes, they will, unfortunately, and at least in swaying the results to some extent.

So again, this is not, you know, people will, this is, we live in a bi.

A political world where people will see what I'm saying as somehow politically anti Trump or anti, whatever.

This is not anti Trump.

It is anti, not anti even.

It is a discussion of the realities of what has happened in every, you know, it happens in Russia, it happens in Turkey, it happens all over the world.

And it's not just in today's age that it happens.

It literally happens.

It's happened since the beginning of time.

And it is an attempt to control the outcomes of the election.

And those that support, support the administration will gladly look past that.

You know, this administration will look past that because it serves what they want.

But the reality is, as a structural reality, this is the truth.

And so that is more what we're trying to talk about to help judge future outcomes and plan accordingly and Equally,

I mean there is the market reaction to something like that.

You know, historically you might have expected an adverse reaction to something like that, but it hasn't necessarily been the case with a whole range of kind of.

Honestly it never really has been.

I mean more so than ever there's a delay I guess but, but again in the short term markets are voting machine and long term they're a weighing machine.

Yes.

These things bend the, the realities of markets eventually.

Yeah but that eventually can happen in five years Alan.

And it can be after things have already passed and other things have kind of melded over and there's been a reflexive effect effect.

News and effects matter, they go into the equation.

But, but the things we know more are, are the, the, the voting machine and, and the voting machine ultimately affects the weighing machine long run as well.

Actually it's the biggest effect.

Markets are the biggest driver of liquidity in the world.

Yeah.

And so you have to, you cannot as part of a process of predicting what happens to markets think of news and I draw a linear line to result in markets.

Actually you need to start with markets and voted the voting machine first put these ingredients in model what's going to happen in the short term and see how that might affect the long term outcomes for those macro effects.

Is a, it is a much more complex multi dimensional system.

But, but the reality of the, of the situation is, is actually I think we do people a disservice by painting a picture that X macro is happening so you need to sell it is they both are true and I know that is complicated for people and confusing but I hate to tell you markets are actually reflexively incredibly important especially at this point to all the outcomes at play.

And what drives markets in the short term is primarily not the macro news itself.

Well, I mean we've talked about this reflexive process in the past and we've talked about it as a positive aspect of the market dynamic in a sense of we've had the wealth effect.

Obviously the K shaped economy has been much discussed and we've talked about in the past as the market rises that improves collateral values, et cetera and that will leverage people then have to buy more.

It sounds like you're saying we're at that point now maybe because we're seeing some cracks in certain asset values that reflexive process is pausing or maybe even starting to go into effect.

So you asked, I should say four about why do I feel confident that this is becoming a tapping process.

Right.

I mentioned the leadership and all the rotation et CETERA probably the simpler point that I didn't make is when markets stopped going up.

The momentum liquidity effect that you're mentioning, which is that releveraging effect which is by far the biggest driver of liquidity in the world.

Again we've painted the numbers, we'll do it again here.

$500 trillion along assets, they go up 20%.

You know, you know, that's a $100 trillion of new collateral that then can be leveraged for new investment in one year.

What does that do?

How do you compare that to like the liquidity of the Federal Reserve or the Treasury?

The other things are, you know, never mind the, well, you know, the wealth effects and the other things that are happening under the hood.

Otherwise it's markets are the biggest driver of the economy now, the biggest driver of markets themselves in the world.

So I know it's kind of a loop and it's hard to think about it, but if markets slowed down and stopped going up, all of a sudden you remove this counterbalance to other things that may have been already kind of drawing and the economy has been drawing on liquidity at the bottom.

Right.

We, you know, we have also kind of reached our natural kind of ending point for now of how much issuance we can do on the short end.

So how much like soft QE we can do, which we've been doing as well.

So that's slowed.

We have a, we're reaching the five year, we've reached the five year anniversary of the bottom and interest rates and then refinancing a debt that is a two, three year draw massive on liquidity because everybody now needs to refinance from to add higher interest rates.

All of these things are draws on liquidity structurally.

And the administration is trying to do things like the SLR ratios and the stablecoin ax etc to try and counterweight that.

But the reality is those overhangs are strong and then they, the only real way they can counteract that.

And they can do that, they can counteract that, that's the reality.

And they could keep this going, but they need the market to keep going up to do that.

And if they're not, it gives out under its own weight.

And so that's where we are.

And so that's the simple fact is the more this hits against a ceiling and can't keep going up and they can't get the momentum moving for all the structural reasons I have.

Eventually the even worse part happens, which is the negative draw that's happening across the market now gets drawn from a decollateralization and the negative effect that comes from that.

And so the risk to the downside are significant at this point if the market can't keep going and it has stopped going.

Good stuff.

Always good to get a whirlwind tour of all the big macro factors and also what are the true drivers of the short term equity market movement.

So fascinating to hear all of that.

So thanks for joining us again.

And Nils will be back next week.

I'm not sure who's with him, but Niels will be back to anchor next week's episode.

So get your questions in the For Neil's and for all of us here.

From all of us here at Top Traders, thanks for joining and we'll be back soon with more content.

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